8 Consequences of Not Having a Sound Business Exit Plan

Key Takeaways:

  • From undervaluing to missing life goals and personal burn-out, not having an exit plan can be a significant risk for business owner and their families.
  • Working with an exit planning advisor well in advance of the desired selling point can dramatically improve the likelihood of the owner achieving a successful outcome.

Believe it or not, all owners exit their businesses at some point. And when the time comes, they want to exit on their terms, which includes their financial independence and succession of their companies explicitly into the hands of trusted people (either internally or externally).

Even if the owner plans to transfer ownership to family or employees, prefers a third-party buyer, or plans to go public, they need an exit plan that aligns with their exit objectives and adapts to their changing personal, business, and economic situations.

Unfortunately, 79% of business owners do not have a written plan for the future ownership of their companies, as per the 2019 BEI Business Owner Survey Report? Further, 16% of business owners have not decided the time frame for their tentative exit, and 7% don’t want ever to exit their business. I guess that the last 7% is immortal; they’ll run the company from the grave.

Even when owners want to exit only at death, a good exit plan makes all the difference between having to liquidate the company someday as the last option or transferring/selling it at the owner’s desired price, on their terms and preferred timeline. A comprehensive exit plan strengthens the performance, value, and future potential of the business.

In the absence of an exit plan, the company’s future and the family’s financial security are often in significant jeopardy. Let’s discuss the dangers or challenges the business owners or their family members will face when they fail to plan an exit.

#1 – Not able to meet personal and financial goals

This is the big one, right? The majority of business owners that don’t have an exit plan fail to realize how much money they will need to live a comfortable retired life, achieve their financial goals post-exit, or do the things they dream of doing after retirement.

Also, they often confuse the gross sales amount and the net sales amount by not considering the mandatory deductions or expenses that will occur upon the sale of a business.

Unfortunately, since they never plan an exit, they also miss out on asking critical questions when it’s soon enough to plan for them. Examples include accounting for the fees and taxes involved in the sale of a business. So, when they need to sell their business, they end up paying too much in capital gains or taxes, which dramatically reduces their net proceeds from the sale.

On the other hand, a good exit plan gives the business owner the time, strategies, and execution options to consider such sale structures that minimize the burden of taxes while allowing them to retire on their terms.

#2 – Reduced business value at the time of the exit

By deciding never to exit, business owners get exposed to ongoing business risks such as economic downturns, structural changes within their business niche, etc. It becomes difficult for them to make constant adjustments and deal with the fast-paced and ever-changing business environment as they age and inevitably face health issues. It impacts their personal life and their business performance and results in a reduction in the value of their companies.

Even when business owners decide never to exit, it eventually will happen. After all, everyone’s time will come at some point (except maybe Elvis). And the problems get graver when there’s no plan for succession or continuation of the business. This is especially true if they have never delegated their responsibilities to anyone. They run the risk of their business not being able to run without them. Of course, this significantly decreases the business value from the perspective of the buyers.

#3 – Not mentally ready to exit

At times, owners’ identities are intertwined with their businesses, and holding a prominent position in business brings them a feeling of self-worth. The business is their life. Their life is their business. The process of separating oneself from the thing that has defined them for the longest time (here, their business) is challenging. They do not know what activities they will pursue after they transition.

Business owners should develop and implement their exit plan at least three to five years in advance. This exercise is worth doing to get a sense of direction both for the business and the owners’ personal life.

#4 – Difficulty in continuing the family business

Family businesses often face unique concerns and challenges due to the very dynamics of families working together. When family business owners assume that no forethought or planning is needed to pass on the business from one generation to another, they put the family members’ legacy, harmony, and financial future at risk.

The transfer of family business from one generation to another is successful in less than 30% of cases, and this probability decreases with every new generation. Numerous family businesses fall apart or get sold due to a lack of planning. It also results in ill-prepared successors and strained relationships between the family members involved in the business.

No multi-generational family business owner wants to be the leader that failed the legacy of the founder. Plan ahead.

#5 – Exiting at the wrong time

Comprehensive exit planning provides business owners with the liberty to choose their time of exit based on favorable economic conditions, conducive industry trends, a comfortable stage in the life cycle of their business, and the timeline of their agendas.

However, when it comes to a forced exit due to unanticipated emergency circumstances, the time of business exit may or may not be suitable. It can lead to massive undervaluation of the company or even liquidation of assets.

#6 – The risk of dishonest potential buyers

Some business owners think that an exit involves waiting for an offer, followed by some paperwork, and that’s it. But the sales process for a business is much more complex. Business owners require planning, assistance from expert advisors, and a proactive approach to find a suitable buyer and exit on their terms.

When approached by a potential buyer, the business owner needs to examine the suitor’s intentions and financial resources before taking the deal forward. The owner should protect the confidentiality of his business during the sales process by following the correct protocol and by working with the right advisors along the way.

#7 – Unable to achieve value-based goals

Business owners often have value-based goals such as benefiting the employees, contributing to the community, providing for a foundation or non-profit, or simply maintaining the legacy of the business. Lack of planning can result in the business owner never achieving any of those goals.

#8 – Not having adequate time to sell the business

An expert advisor can coach owners on how they need to get their business exit-ready before going to the market. It is a complex and time-consuming process that readies the company to attract good offers.

In the absence of an exit plan from an early stage, it might be too late to make the company exit-ready when the owners finally decide to transition. The sudden exit decision may not allow them sufficient time to prepare their company for an exit, leading to a poor valuation and a resultant poor sale proceed.

Closing Thoughts

As a business owner, ask yourself these questions if you think you don’t need exit planning:

  1. What are your personal and financial goals after your retirement, and what amount of money will it take to reach them?
  2. Do you know the current value of your unique business?
  3. What is the best way to increase the value and cash flow of your business?
  4. Do you know how to sell your company to a third party without having to pay too much in taxes?
  5. Do you know how to transfer your business to insiders, such as family members, co-owners, or employees, for an amount rather than just giving it away?
  6. Do you have a continuity plan for your business in the event of your death or incapacitation?
  7. What is your plan to secure your family’s financial security if unanticipated circumstances force you to exit your business?

If you don’t answer any of these seven questions, well, you probably need an exit plan.

Dan is the Founder of Quantive and Value Scout. He has two decades of experience in leading M&A transactions. Additionally oversees Quantive's valuation practice and has performed thousands of business valuations.



© 2024 · Quantive.  >> Go Army, Beat Navy!